Unfortunately, investors who focus on nominal share price are at best wasting their time and at worst exposing themselves to huge risk.

Share price simply does not matter — the quality of your investment does. And the sad reality is that most stocks with a cheap share price tend to be of a lesser quality.

Here are the many reasons a focus on “cheap” stocks can be the most expensive mistake you ever make.

Penny stocks are the playground for scams

Some folks fall in love with the fast-paced world of penny stocks and microcaps, but the horror stories in this space are all too common. Consider the unscrupulous “stock tips” from celebrities like rapper 50 Cent on Twitter, or Notre Dame football legend Daniel “Rudy” Ruettiger charged by the SEC in a pump-and-dump scheme in 2011. And more recently, read about an August penny stock bust that involved a $140 million fraud ring across 35 countries. This is the crowd you’re running with when you go for microcaps that trade on the pink sheets.

Cheap stocks have often fallen from grace

What about legit stocks on the NYSE that trade for $5 instead of 5 cents? Well, let’s be honest… no stock trades for $5 because it’s red hot. Stocks that are doing well go up and not down. Right now some of the biggest (by market capitalization) stocks in the single digits include the battered National Bank of Greece (NBG)
US:NBG
, barely break-even drugstore also-ran Rite Aid
RAD, -3.78%
, and troubled chipmaker United Microelectronics
UMC, +0.40%
. All have losses that top 50% across the last 10 years. Sure, they might go up from here… but will likely never reclaim past valuations.

Turnarounds are highly uncommon

People like to hold up the example of Apple Inc.
AAPL, +1.72%
with its return from the brink as the case of a turnaround play that made investors millions. But if you think geniuses like Steve Jobs and iconic companies like Apple are common among $5 stocks… well, think again. Turnaround stories more typically end up with an ending similar to the current narrative at BlackBerry
BBRY, +0.00%
.

Cheap stocks don’t go up faster

Consider Priceline.com
PCLN, -0.20%
traded for $600 a year ago and now trades for over $1,000 share for a 60% gain in 12 months. That included a 21% run in about three weeks this May. So don’t tell me expensive stocks can’t move big in short order.

You can buy one share

Let’s say you had $600 to invest a year ago and bought 240 shares of the Sirius XM
SIRI, -1.09%
, the cult stock of bargain investors everywhere, for about $2.50 a share. It’s now at $3.80, so you’re sitting on 52% gains… not bad! But you also could have bought one share of Priceline at $600 — there’s no minimum on shares, remember — and made over 60% gains instead.

Do the math

Just to belabor this: 240 shares of SIRI x $2.50 per share = $600, and 1 share of PCLN at $600 per share = $600. And then, 240 share of SIRI x $3.80 = $912, and 1 share of PCLN at $1,000 = $1,000. Which is the better investment?

Most shares aren’t Priceline

But what if you have less than $600 and want to invest? Well consider that only 12 stocks on the entire NYSE and Nasdaq (out of more than 4,300 issues) trade for more than $400 a share. That’s a mere 0.3% of your investing options — hardly a big deal. And hey, only 150 stocks or so trade for $100 or higher. That’s 3.5% of your investing options.

You can buy partial shares anyway

What if you simply just HAVE to buy a pricey stock like Priceline.com? Well, a host of online brokers often provide access to “fractional shares” … so you can buy a half a share or less instead.

Maybe you shouldn’t be buying stocks, anyway

So if you only have $100 to invest and if you have your heart set on Priceline.com, you can still buy it. But why in the world would you? Your broker may charge you fees as high as $10 a trade — and charge twice, mind you, since you get hit on both the purchase and the sale — so you need a 20% gain just to recoup the cost of trading.

As always, feel free to point out the typos and bad advice in my columns anytime, either via email or Twitter.

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